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Monetary Systems & Productive Assets
by Professor von Braun

December 10th, 2007

Many commentaries currently remain focused on any one of a number of issues --  the subprime crisis, the liquidity crisis, the dollar crisis or the potential for massive defaults within the banking system itself or from other counterparty players. Few seem to be focused on what's really at stake here.

Several years ago an Australian company introduced a non-alcoholic whisky called Claytons. It was advertised as the whisky you have when you are not having a whisky, but the idea of a whisky drinker drinking a whisky that is not a whisky always seemed quite strange, but stranger things have been known to happen.

Take the monetary system for instance. Currently on a global basis we have a plethora of fiat currencies, none of which have the ability to provide for settlement by the central banking systems themselves. Traditionally, official settlement of trade imbalances between countries was made in gold. The US dollar was, in 1944, nominated by Central Bankers as the official global reserve currency because it could be redeemed for gold and therefore, so the rhetoric went, holding dollars meant that other central banks held reserves that were as good as gold.

That concept went out the window with President Nixon's closing of the gold window on August 15, 1971 and since that time we have had what is at best described as a monetary system you have when you don't have a monetary system. The Clayton drinkers would understand. Since then we have seen the introduction of the Euro, which seems to be a case of 'if you can't beat them join them', as in an imitation of the US non-redeemable monetary system and the expansion of the Japanese banking system by way of increased liquidity ie: increasing debt levels, into the banking system.
The US appears to have the advantage over the other players in this game since they started it and all the other players that followed suit are stuck with the dollar as a reserve, which in and of itself may be problematic. If so, whose problem actually is it?
We hear about the central bankers increasing liquidity and yet nobody seems to ask the question as to what exactly is liquidity? Liquidity must come from capital and that capital must be directly connected to a neutral item, which is why gold was and still is the ultimate form of settlement. Settlement means the completion of a transaction and transactions that are "settled" with debt are not settled transactions at all. They are increased liabilities.

Under the Claytons look-alike the global monetary systems have no means to settle anything and therein lies the problem with most commentaries about economics. To read about China talking about holding Euros instead of dollars, or for Iran wanting to be paid in Euros is a joke. Changing the name of rain will not remove the inherent capacity of falling water to make you wet!

International trade has been going on for thousands of years and the principle of that trade is essentially the bartering of goods. Whatever the goods are they are best described as commodities, and gold's traditional role has been as the ultimate form of settlement -- of being widely accepted and completing a transaction.

Societies as we know them are dependant upon several key ingredients for their existence and for the ongoing maintenance of that existence. Obviously food and shelter are essential but the basic ingredients are the metals. Without them things tend not to work as well and modern conveniences are all dependent upon them. In addition, for societies to maintain themselves, a prudent and inherently transparent banking system is a necessary ingredient.

What we have seen over the last 75 years or so, since President Roosevelt confiscated the gold owned by citizens of the United States and led the US down the New Deal road, (a road it is still on), is a decrease in the recognition that banking systems, to actually work successfully, need to maintain asset liquidity.
In the monograph "Liquidity" by Melchior Palyi, published by CMRE (, Mr. Palyi points out that every banking crisis dating back to the recurrent waves of Venetian bank failures in the sixteenth century had the same ingredient: "the wholesale liquidation of debts was the focal point, said debts bought about by a credit expansion along non-commercial lines, financing long-term loans, speculative ventures and governmental expenditures on a substantial scale."

Real estate is of course a non-producing asset and as such is not a commercial proposition. By commercial I mean that the return of capital is, at the very least, likely to occur.

Roosevelt effectively removed the notion of the return of capital from the US society by confiscating the capital and substituted a system that was dependent not upon the good judgment of its citizens but rather was dependent upon the introduction of irredeemable bank notes which were themselves dependent for their ongoing existence upon the necessity to inflate the apparent value of non-productive assets such as housing.

Now what we have globally are central banks operating monetary systems that have little or no asset liquidity available to them. The global monetary system is dependent upon the continued acceptance of US dollar denominated debt which, on a larger scale, has little chance of ever being redeemed for anything that remotely resembles a tangible, widely accepted liquid asset.
The issuance of debt does not provide liquidity!

It may well be that the continuing asset inflation game that effectively commenced under Roosevelt and the New Deal is in its final innings and that the housing debacle that's unfolding will be the straw that breaks the camel's back. But what would the outcome be?

Perhaps it boils down to two players, as of course do most games. And in this case it's a classic "us versus them" type of situation. It's the US central banking system versus all other central banking systems. As the other CB's are predominately holding US paper as "reserves" and the US continues to issue more and more of these "reserves", and while the commercial banking systems globally seem determined to compete with the principle of debt issuance for productivity gains, and while officially there is no neutral component that is required, I suspect it may well be not the outcome most people are currently commentating on.

The other CB's are NOT able to dispose of their US denominated reserves as there is no one else to dispose of them to, so they are at a disadvantage to the US. The offset to that is that the once famous and much heralded US consumer is about tapped out. The internal US banking system along with its investment banks and mortgage issuers, has gone where no man or banking system has gone before (other than a handful of pirates, rogue dictators and some over-zealous colonial powers) and that is they have raped and pillaged their own population to the degree that their ability to eat the debt required to fund consumption has far exceeded their ability to be productive and repay that debt. The sheep have been shorn one time too many and now their individual treasure chests are about to be seen for what they are. Empty! No more can the illusion of wealth be created by the artificial inflation of house prices and paper assets. The emphasis on the individual's home equity may well become a thing of the past.

The repercussions of there being no more wool will have some interesting ramifications, not the least being the shortage of capital to facilitate the extension of credit, and we are beginning to see this in the interbank lending markets. Real asset liquidity is not there which is why banks won't lend to each other. They know what the others are holding by virtue of their own undisclosed holdings and their strong suspicions that the other party is holding similar liabilities. There are few markets it seems for CDO's, SIV's or any other 3 or 4 letter financial package.

So what does that leave the individual investor by way of a safety net? We need to remember that the banking system is an imposition, something that has been imposed upon an already existing system of global trade. That system is alive and well and the traditional means of settlement, gold, currently, can be purchased at will. All the metals can be purchased but as I have written about before one needs to take delivery of the product rather than leave it in the hands of the magicians.
In addition those who intend to remain residing in the US need to look closely at obtaining productive assets or assets that have the potential to be productive, and by productive I mean generate the production of commodities that will provide both cashflow and a return on capital.
The venerable Richard Russell ( sums it up when he says, "the winners in a bear market are those who lose the least." The unfolding debacle is likely to be not your run of the mill bear market as earlier debacles have not suffered from a global shortage of asset liquidity and dubious reserves within the world's banking systems.
"How liquid are your assets?" should be THE question that's on the minds of all investors.

The Prof can be contacted by email at

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

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The Rocket School of Economics -- The Lecture Series Index

  • 22 May 2009 -- An Often Overlooked Issue!
  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
  • 01 Jul 2001 -- ...Said the Fly to the Spider.
  • 14 Jun 2001 -- Upward and Downward!
  • 28 May 2001 -- Volatility Time, Again!
  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
  • 29 Oct 2000 -- Oh The Tangled Web We Weave ...When We Set Out to Deceive
  • 24 Oct 2000 -- A Mystery!
  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
  • 25 Sep 2000 -- Buy Gold Now!!
  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs

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